How do I use the mortgage affordability calculator?
The Mortgage affordability calculator gives you an estimated value of the property you can afford to purchase. To use the affordability calculator, start by entering your annual income, down payment amount, interest rate, and mortgage amortization length.
If you're not sure what interest rate your lender will use to assess your affordability, use the Bank of Canada qualifying rate of 4.94%. Lenders often use the Bank of Canada qualifying rate to determine the maximum mortgage amount they can extend to you.
Your mortgage affordability also depends on your projected housing costs, such as property taxes, heating costs, and condo fees.
Secured and unsecured debt obligations, such as credit cards and auto financing, are also taken into account. You should fill out all these fields to get an accurate estimate of your maximum mortgage affordability.
How is mortgage affordability determined?
Mortgage affordability is determined by looking at your income and down payment relative to your expected housing costs and current debt obligations. It uses the Gross Debt Service Ratio (GDS) and Total Debt Service Ratio (TDS) to determine the maximum mortgage payment you can afford.
The affordability calculator assumes a scenario where you pass the mortgage stress test and finds the maximum mortgage payment you can afford. By default, the calculator uses 39% and 44% for GDS and TDS, respectively. You are, however, free to change the GDS and TDS thresholds in the calculator's settings.
Does the source of my income affect mortgage affordability?
Your income source can affect your mortgage affordability. Not all sources of income are treated the same, and it varies from lender to lender. Generally, mortgage lenders want stable sources of income.
For example, if your income is mostly commission-based or paid on a contract basis, then a mortgage lender may want to see a longer history of re-occurring income, up to two years in some cases.
If you're in a situation where your source of income may not be treated as equally, as a stable salary based source of income, then it's best to talk to a mortgage broker. Mortgage brokers may have access to mortgage lenders that deal with mortgage applicants with non-traditional sources of income.
Does being self-employed affect my mortgage affordability?
If you're self-employed, you may have to jump through a few extra hoops to get a mortgage. Most mortgage lenders are going to want to see up to two years of self-employed income history before they'll deem your source of income to be "stable" enough for them.
There are also mortgage lenders who specialize in providing mortgages to self-employed individuals. These lenders have a more straightforward and streamlined approach to providing mortgages to self-employed people. Speak to a mortgage broker or search online if you want to find these lenders.
What is the gross debt service ratio? (GDS)
The Gross Debt Service ratio indicates what proportion of your income goes towards expected housing-related costs. These costs include the anticipated property tax of the home you're looking to purchase, heating costs, condo fees, and mortgage payments.
What is the total debt service ratio? (TDS)
The Total Debt Service ratio indicates what proportion of your income goes towards expected housing-related costs in addition to existing debt payments you must meet. Housing-related costs include everything from the Gross Debt Service Ratio calculation. Debt obligations will consist of credit card payments, car payments, lines of credit, and any other secured or unsecured forms of debt.
Why are credit card balances required?
Minimum credit card payments vary from card to card. As a result, lenders will usually take 3% of your outstanding credit card balance and divide that by 12 months to estimate your monthly credit card payment. Most other forms of unsecured debt balances, such as unsecured lines of credit, are treated this way, as well.
What do the GDS and TDS ratio thresholds mean?
The GDS and TDS ratio thresholds indicate the maximum proportion of your income that can go towards housing or debt expenses. The CMHC recommends a GDS ratio threshold of 35% and a TDS ratio threshold of 42%. In other words, no more than 35% of your income can go towards housing costs. And no more than 42%, of your income, can go towards housing costs and debt payments. In practice, however, most lenders will allow for higher GDS and TDS thresholds of up to 39% and 44% respectively.
What is the minimum down payment required for a mortgage?
The minimum down payment required for a mortgage depends on the purchase price of your home. It is based on a tier system as follows:
- If the purchase price is $500,000 or less, the minimum down payment is 5%.
- If the purchase price is $500,000 to $999,999, the minimum down payment is 5% on the first $500,000 and 10% on the portion from $500,000 to $999,999.
- If the purchase price is $1 million or more, the minimum down payment is 20%.
For example, if the purchase price is $650,000. The minimum down payment would be $40,000 (5% on the first $500,000 plus 10% on the remaining $150,000).
How much are closing costs?
You should be prepared to pay closing costs associated with purchasing a home. Closing costs include land transfer tax, appraisal fees, legal fees, inspection fees, among others. Typically closing costs account for 1% to 4% of the purchase price. You should set aside this amount to pay for these expenses at the time of closing.
How can I increase my maximum purchase price for a home?
There are a number of ways you can increase your maximum purchase price on a home. A few of the most effective methods include:
- Increasing your down payment – Increasing your down payment will decrease your mortgage payments, which will reduce your overall housing costs.
- Increase your income – Increasing your income will boost your purchasing power. Lenders are more willing to give larger mortgages to those who have more substantial incomes.
- Reduce existing debt obligations – By reducing your debt obligations, you reduce your reoccurring debt payments. This, in turn, will free up more of your income, which can be used to make mortgage payments.
- Apply with a co-applicant – By applying for a mortgage with a co-applicant, the mortgage lender will consider the co-applicant's income in addition to your own.